Treasury’s decision to admit property lender Equitable Mortgages, now under investigation by the Financial Markets Authority (FMA), into the Crown retail deposit guarantee seems set to cost taxpayers' around NZ$40 million.

The third report from receiver Grant Graham of KordaMentha predicts up to 70%, or NZ$134.6 million, of the NZ$192.3 million (NZ$178 million was guaranteed by the Crown) of principal owed to about 6,000 secured debentureholders when Equitable was placed in receivership on November 29, 2010 will be recovered.

Graham says KordaMentha has thus far repaid NZ$50 million to investors and the Crown and says loan recoveries – Equitable had loans of NZ$188.4 million outstanding at the date of receivership – might enable him to repay between 65% and 70%, or NZ$124.9 million and NZ$134.6 million of the total owed to investors on the date of receivership.

Treasury says it has paid out about NZ$170 million to some 3,700 Equitable depositors, representing about 97% of depositors and amounts owing. That leaves taxpayers’ at least NZ$43.4 million short, based on the top end of the receiver's expected recovery range and the amount guaranteed by the Crown. At the low end of the range, taxpayers' would be NZ$53.1 million short.

Receivers were appointed to Equitable Mortgages after the company's management told Treasury it no longer had a viable business given the tough economic climate and it would struggle to meet new Reserve Bank capital requirements.

Auditor General Lyn Provost's audit report on the implementation and management of the Crown retail deposit guarantee scheme, released last October, revealed that Treasury let Equitable Mortgages into the scheme despite the Reserve Bank's view that the property lender, which ultimately failed whilst holding about NZ$178 million in Crown guaranteed deposits, wasn't eligible because it primarily provided financial services to a related party.

Equitable Mortgages was part of the Equitable Group controlled by the rich lister Spencer family headed by Chris Spencer.

Provost's report says the Reserve Bank's view was Equitable Mortgages wasn't eligible for the scheme because it primarily invested in the Equitable Property Mortgage Fund, an investment fund governed by a trust deed formed in 2007 to hold most of the Equitable Group's mortgages. It was managed by Equitable Property Finance, another arm of the Equitable Group. The Fund invested in loans secured by first mortgages over commercial, industrial and residential properties.

"It was the Reserve Bank's view that Equitable Mortgages was providing financial services to a related party, which was contrary to one of the main eligibility criteria in the policy guidelines (which set out the criteria considered by Treasury when assessing applications)," says Provost.

"However, the Treasury took a broader view and determined that, because of the trust arrangement and the nature of the transactions, the recommendation of ineligibility from the Reserve Bank was not persuasive. The Treasury concluded that it was in the public interest for a guarantee to be granted, so the application was approved on December 4, 2008."

Meanwhile Graham notes that an insurance company related to Equitable provides potential for the recovery of money not included in his estimate.

“We are assessing the claim that can be made under these policies and discussing with EGI its ability to meet these claims, which we expect will significantly exceed EGI’s reserves. Our recovery estimate does not allow for any recovery from these policies.”

Nonetheless he says he expects there to be a shortfall owing to investors and the Crown.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

BIG SAVINGS ON

BIG CURRENCY TRANSFERS

Currency rates on this page are supplied for indication purposes only, and may or may not be rates offered by any institution. We source this data from publicly available sources, at the time shown above. Rates change often, and different institutions are competitive in different currencies. Contact institutions directly for actual quotes. The comparisons on this tool are controlled by interest.co.nz.